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Volume Declines In April

Municipal issuance suffered a setback in April as both tax-exempt and taxable volume declined but year-to-date volume remained modestly higher.

Total monthly volume was the lowest in 14 months, and it was the slowest April since 2002.

Overall volume was $26.0 billion in the month, according to preliminary data from Thomson Reuters. That was a 29.4% decline compared to April 2009 when volume was boosted by a huge California deal.

The drop contrasted gains seen earlier in the year, as first-quarter issuance totaled $103.7 billion, a 21.5% increase from the same period last year.

With April now in the mix, the year-to-date gain was trimmed to 6.1%, with $129.7 billion of total issuance.

Market participants said the year-to-date data is more ­reflective of the overall trend, while April was just a blip.

“I’m tempted to say it’s just a monthly fluctuation, just statistical noise,” said Fred Yosca, managing director and head of trading at Bank of New York Mellon.

Driving the decline last month was the relative dearth of issuance among states. Only $2.2 billion of state debt came to market in April, a 77.2% decline from the $9.7 billion of volume in April 2009.

From January to April, the decline among state issuance was a less dramatic 7.7%.

Volume from state agencies also fell 20.8% compared to April 2009. Only local authorities, with an 8.6% advance to $5.09 billion in April, saw a sizable increase from last year.

Mike Keane, chief operating officer of Rockfleet Financial Services Inc., said the apparent year-over-year decline among state volume is largely skewed by California offering $6.9 billion of general obligation bonds in April 2009 — the fourth-largest single issuance in history.

“If you take that out, then you fall into more of comparable volume for state issuance,” he said, adding that the market is still on track to see more than $400 billion of total volume this year.

“It’s not so much a trend as an occurrence — market timing of issues rather than a trend,” Keane said. “The need to sell bonds is high, state funding needs are at all-time highs, so you’ll see issuance be on the higher side this year.”

The 2009 California deal included $5 billion of taxable Build America Bonds, so it also explains why monthly taxable issuance fell 22.9% to $8.4 billion, and why BAB volume sunk 20.1% to $6.3 billion.

Meanwhile, tax-exempt volume declined by 32.8%, to $17.4 billion compared to April 2009.

Similar declines in the traditional tax-exempt sector in previous months were attributed to the fact that taxable BABs have played a larger role in the market and have limited tax-exempt issuance, particularly for longer-duration deals. Yosca said April’s drop in tax-exempt issuance is likely just more noise.

“It sure doesn’t mean that they fixed all infrastructure problems,” he said. “The need is still there — everybody knows that.”

Insofar as the yield curve played a role, it’s worth noting the 10-year triple-A yield moved up 24 basis points from 2.82% in mid-March to 3.16% in the first week of April — the highest rate since early July, according to Municipal Market Data.

Attributing any decrease of issuance to higher interest rates may not go too far, however, as yields remain relatively low by historical standards.

Moreover, while new-money issuance was $15.62 billion in the month, reflecting a significant decline of 36.3%, refunding deals — which an issuer, in theory, only does when the market climate is favorable — picked up by 4.6% to $7.69 billion.

Keane said the climate for refunding is favorable mainly due to the steep curve and lower muni-to-Treasury ratios. Those factors allow issuers to sell refunding bonds and use proceeds to refinance outstanding debt.

In an advance refunding, the proceeds typically are used to buy Treasury securities that are placed in escrow to pay interest on the refunded bonds until the bonds can be called.

“Reinvestment of bond proceeds into Treasuries last year were out of whack,” he said. “Now we’re at pretty low percentages to Treasuries, so when they take the bond proceeds and put it into taxables for the period of time you’re allowed to make, it’s not negative arbitrage.”

The muni-to-Treasury ratio averaged 104.4 in April 2009 but last month was just 79.5, according to MMD.

From January to April, refunding volume was up 30.2% to $31.53 billion, while new-money issuance was up 4.9% to $82.16 billion.

Issuers and investors continued to shun bond insurance in April.

Just 113 deals worth $1.53 billion were insured in the month, a market share of only 5.9%.

That’s slightly less than the 6.2% ­insured share seen from year to date, while the first four months of the year are down by 47.6% from the same period a year ago.

While the market struggles with just one active private insurer, Assured Guaranty Ltd., other state-supported guarantees are playing a more important role.

These guarantors — such as the Texas Permanent School Fund — saw 67 deals worth $1.12 billion of issuance in April, a 27.7% increase from April 2009. Year to date, such guarantees were up 81.9%.

The biggest deal to hit the market last month was a $1.3 billion issue for the Puerto Rico Electric Power Authority on April 7.

A week later Chicago came to market with a $1 billion issue for O’Hare International Airport. Each deal offered both BABs and tax-exempts.

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